What % of ARR is spent on marketing and sales?

Welcome to a SaaS-growth focussed Thursday. Today I think out loud about AI's impact on your SaaS, whether Typeform really needs 650 employees, and what % of ARR should be spent on marketing and sales. Enjoy the read.    - EveD. 

ARTIFICIAL INTELLIGENCE

Is AI going to destroy your SaaS model?

If you're not scared by AI, then you don't fully understand its implications. I am spending January deep diving into these threats - and opportunities - that AI offers, and will start writing more about my conclusions and predictions soon. In the meantime, I was encouraged to see a tweet thread from Amit Gupta with some good news. Amit runs Sudowrite, a SaaS startup powered by AI  (it helps write better fiction by using OpenAI's GPT-3). When ChatGPT launched seemingly as a free alternative to Sudowrite, Amit saw users cancel their subscriptions, and he was "blindsided".

But a funny thing happened: instead of negative growth, Sudowrite grew 40% in one month, and crossed the $500k ARR mark.  And the business continues to grow. 

That actually makes sense. A million people played with ChatGPT last year - that's an immediate and unexpected increase in Sudowrite's potential user base. A million people have now tasted what AI can do, and the smart ones are thinking about how to convert the opportunity of that into cash. As Amit says, "Sceptical writers got a taste of AI from ChatGPT, then searched for a tool that was purpose-built for writing better fiction with AI." One of the easiest ways to start using OpenAI's technology quickly is to use it to create content, which is exactly what Sudowrite helps you do. And hence... subscriptions went up. 

The lesson here is not that AI will increase your business. It very well might not. It might put you out of business, if not in 2023, then in 2024 when more advanced versions launch. The lesson, rather, is that you need to start thinking about worst case scenarios, and start figuring out how to turn them into advantages. In Amit's case, I would not breathe sigh of relief if I was him: users will soon have access to a lot more competitors once the opportunities are clear, and the landscape will get tough. If the only differentiator is the power of the AI - well, that's not a differentiator at all. Everyone will have equal access, and there are a lot of people who will soon start focussing on how to harness the AI to their advantage. In the world of content and SaaS applications, it might very well end up being a race-to-the bottom kind of game. 

I'm not going to be trite and give you "3 ways to not get outsmarted by AI". The way forward is complex, and nuanced. I'm thinking about it, a lot. You should be too. Start by asking how you can both harness the power of what AI can do, and mix it with what AI cannot do. Getting that mix right is a good first step. 

Count on the fact that I'll be writing about this more. I just need to do a lot more thinking first. 

SAAS STORIES

Typeform has 650 employees?

Today I learnt that Typeform  apparently has 650 employees. I don't have access to current ARR, but in March 2022 it had $70m ARR, 450 employees and raised $135m for a $935m valuation. Obviously any valuation in 2022 can be taken with a pinch of salt today, but its average revenue per employee in March last year was at about $155k, which is low. The whole strength of a SaaS business is that it becomes more scalable as it grows, hence the average revenue per employee should rise as the ARR rises. This is well demonstrated in the following graph:

The extra 200 employees require an additional $31m in ARR to keep up with the ratio, but should be much higher to catch up and take into account the scalability. 

But seriously: 650 employees?? For what is mostly just a form submission business (although it is expanding into other verticals)? I get that they process a lot of submissions and data, but that is not managed by quantity of staff but rather the quality of the solution. At at time when "austerity" is the word-of-the-year for most startups, Typeform has some serious head-scratching to do. Or maybe they should just call Elon Musk?

PODCAST BRIEF

Three marketing guidelines to drive your 2023 

Today's podcast highlights are from "SaaS Nordic", episode 62 featuring guest Lisa Kruse, founder of a marketing-as-a-service agency, Holy Comms.  She discusses marketing tips for a SaaS business going through the 2023 possible-recession climate: 

• Choose your marketing channels extremely carefully. You will need to scale down your spend, so it’s best to focus on 3 channels, and obsess over them rather than try to keep an egg in every channel basket. 

• As headcount downsizes or hiring is frozen, your specialists will need to be comfortable with becoming generalists. Your content writer might have to do PR work, for example. 

• Be patient, and be daring. You cannot just copy what everyone else is doing, because it becomes difficult (and expensive) to stand out. You need to innovate your marketing, find your own voice and style, and go all-in on that. 

Listen by clicking link above.

GROWTH TOOLS GUIDE

In about 3 weeks, the first edition of the Growth Tools guide is going live. All NMB subscribers get it in their inbox, free. The goal is for founders and growth teams to learn about new growth tools, new growth opportunities and alternatives to their existing stack. You can't lose out by reading it (on your phone, your desktop or...print it out!). Want to include your growth tool in the guide and be seen by 20,000 founders in 2023? Get in touch [email protected]

DATA, REPORTS AND STUDIES

Q: What % of ARR is spent on marketing and sales?

A: It depends somewhat on the type of funding, and the level or ARR, but on average, private SaaS companies spend 16% of ARR on sales, and 10% ARR on marketing. (This data is from March 2022, from a survey conducted by SaaS Capital. You can download the full report here)

Here is a breakdown of median category spend by a $3-5m ARR SaaS startup:

Up and to the Right - with the correct link!

(Sorry about the incorrect link yesterday!) I wrote a book about SaaS growth! You can preview it on Amazon. It's a good read for any SaaS founder or growth team member, who wants to build sustainable growth for their VC- or self funded startup. 

Themes: Acquisition. Retention. Monetization. Growth teams. Channels (looking at: social media, paid ads, sponsorships, events, webinars, community, SEO, personal brands, referrals, affiliates etc). And so much more. Best 10 bucks you'll ever spend. 

See you Monday!

Thanks for reading. I'm enjoying publishing this newsletter! I think I'll take Fridays to plan content for the upcoming week, so the whole process is more streamlined. We'll see how it goes.  Of course, I'd appreciate if you shared the newsletter with others...it's always difficult to get past that cold start problem when launching new things. Thanks for your support. 

PS: If you have any questions re SaaS growth, DM me on Twitter or email me. @eved and [email protected]. I'll help if I can.